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How to open a restaurant

Tips for starting a new business in the service industry

Many aspects of how to open a restaurant are similar to opening any business. Other things, like food licenses, are unique to the food service industry. Here's what you need to know to get started.

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Getting funding to open a restaurant

Funding sources for opening a restaurant are one of the things that are similar to any business. You have a few options:

  • Personal funds. You can fund your restuarant yourself, but this is risky.

  • Partners or other investors. You may find one or more people willing to help with funding and also with the daily work. Others may invest funds in exchange for an ownership share but otherwise stay out of the way.

  • Loans from financial institutions. Banks have become more interested in lending to small businesses. This is a common financing method, but it can delay profitability as much of your early income may go to principal and interest payments.

  • Other private loans. Angel investors or peer-to-peer lenders may also be an option.

  • Loans from family and friends. If you take this route, make sure it’s clear from the start if the money is a loan or for an ownership stake. It’s also a good idea to have a written agreement to avoid misunderstandings that can affect your relationships.

You may also want to look into local or state government programs designed to help finance small businesses.

Before taking out a loan, figure out exactly how much you'll need to get started.

Leasing commercial space for your restaurant

When evaluating potential spaces, consider the building’s:

  • Location. Is it accessible? Is there enough parking nearby? If you’re hoping for foot traffic, is it easy to walk to?

  • Rent. Do a profit projection for your first year in business to figure out how much rent you can afford.

  • Kitchen space. Can you create a layout to allow for organized, efficient food prep and serving?

  • Dining area. How many diners do you want to be able to seat at once? Is the space big enough to avoid crowding? You’ll also need adequate storage space and an office area.

Legal requirements of running a restaurant

In addition to a business license you’re going to need a variety of other licenses to serve food and/or alcohol. State liquor laws vary widely, but in general, a restaurant needs 1 of 2 types of liquor license:

  • Beer and wine license. As the name suggests, this license allows you to sell only beer and wine.

  • All liquor license or restaurant license. This allows you to sell any type of alcohol, including hard liquor and spirits.

You’ll typically need to renew your liquor license every year.

State and local laws may regulate other things like the following:

  • How many drinks a customer can have at one time.

  • Whether or not happy hours or other discount drinks are allowed.

  • Whether customers may take home unfinished bottles of wine.

Many towns limit the number of liquor licenses they’ll issue. If none are available, you won’t be able to get one.

You’ll also need a food-service permit to show your restaurant meets sanitation, storage, and preparation regulations. Your state or town may have additional requirements, like health, zoning, and/or building permits. Your workers may also need food handlers permits.

Insurance requirements for starting a restaurant

Insurance helps protect your investment. Two important policies to carry:

  • Business liability insurance. This policy protects you in case customers get hurt on your property. For example, from a fall or food-related illness.

  • Property insurance. This protects the building and its contents in case of fire or other damage. It may exclude damage from natural disasters.

If you have a liquor license your state may require you carry liquor liability insurance. Other policies you may need include workers’ compensation, life insurance, food contamination insurance, and specific peril insurance.

Accepting credit cards

It’s gotten harder to operate as a cash-only business, because many people want to pay by credit card.

The merchant account is the standard method for accepting credit cards. This involves contracting with a bank and paying a fee to the card companies for each transaction. It can be expensive and hard to get for small businesses. That’s why many used to avoid accepting credit cards.

These days there are other options, called third party accounts. Small businesses can accept cards using the merchant accounts of payment processors like PayPal, Square, and Payline Data. Fees are generally a small percentage of the sale plus up to 30 cents per transaction.

Legal issues in hiring and scheduling employees

Hiring the right people for the right jobs is important to making your restaurant a success. You also need to follow federal, state and local laws, which regulate everything from hiring to what you can require your employees to do.

While a job application is an excellent way to narrow your search to qualified prospects, you must also verify they are legally eligible to work in the U.S. This involves completing and retaining a I-9 form for each employee. You can also verify the information in the I-9 using the online E-verify system.

Creating detailed job descriptions is also a good idea to ensure your employees know exactly what their jobs are. If you intend to hire people under age 18 for some of these jobs, federal laws limit the types of duties you can give them. For example, most driving duties are off-limits. Employees under age 16 are further limited in the types of jobs (non-hazardous only) and in the hours they may work.

You must also provide a safe and non-discriminatory work environment for all employees. Other specific requirements may vary by state and/or town.

Keep your wage and tipping policies legal

Federal and state laws set strict requirements for minimum wage and handling tips. Many states follow the federal minimum wage, but some have set their own higher minimum. Make sure you know what your state requires.

Most states allow you to pay a lower base wage to tipped employees, making up the difference with tips (called a tip credit). Federal law sets this minimum at $2.13, but again some states may have higher minimums. A few states, including Oregon and California, don’t allow tip credits.

You can require tipped employees to pool or share tips to be distributed to all eligible employees, as long as it won’t drop wages below minimum. Eligible employees may vary by state, but can’t include owners or managers.

Since tips are taxable income, you need a process for employees to report their tips to you every month. The IRS has a form, Employee's Daily Record of Tips and Report to Employer, so and your workers can keep track of tips earned.

You must then report these tips to the IRS each year, using Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips.

Every business is unique, to get legal help specific to your restaurant, consult a local business attorney.

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